What permits all bonds "in good standing" to be carried at their amortized cost in the statutory balance sheet?

Question

Options

• APolicy holder association
• BNational Association of Insurance Commissioners
• CTemporary Impairment Application investment
• DNational institute of insurance

• A
  3% (1)
• B
  78% (25)
• C
  13% (4)
• D
  6% (2)

Explanation

The National Association of Insurance Commissioners (NAIC) establishes statutory accounting principles for insurance companies, including the rule that bonds "in good standing" - those not in or near default - may be carried at amortized cost rather than fair market value on the statutory balance sheet. This smooths earnings volatility and prevents insurers from being forced to recognize unrealized losses on bonds they intend to hold to maturity.

Why the distractors are wrong:

• A (Policyholder Association): These are state-level guarantee funds that protect policyholders if an insurer fails - they have no role in setting accounting rules.
• C (Temporary Impairment Application investment): This is not a real regulatory body or recognized accounting standard; it's a fabricated distractor.
• D (National Institute of Insurance): No such body exists in U.S. insurance regulation.

Memory tip: Think of the NAIC as the "rule-setter" for insurance company financial statements - if a question asks who permits or requires a specific statutory accounting treatment, the answer is almost always the NAIC.

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